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Earlier this week, Bank of America Put a Buy rating on the FTSE 100 Index medical company Smith and nephew (LSE: SN.). The vote of confidence was further confirmed by an Outperform rating published the following day by broker Bernstein.
So what has motivated this renewed faith in the medical technology company? Should you consider buying shares now?
Hard times
I have considered buying Smith & Nephew shares several times over the past year. However, persistent problems at the company have prevented me from buying. The shares are down 40% over the past five years, hitting a low of £8.96 last October.
It's a disappointing outlook for a stock that gained nearly 300% in the decade leading up to 2020.
During these difficult times, the company has had no fewer than three CEOs, in part due to pay disagreements. Most recently, the board narrowly approved a 30% pay increase for CEO Deepak Nath, but not without significant shareholder opposition.
In 2019, CEO Namal Nawana reportedly resigned because his requests for a pay rise could not be met under UK corporate governance standards.
An active impulse
Now that the pandemic-era supply chain issues are mostly resolved, I imagine things should start to look up. Hospital operating rooms are back up and running at full capacity, and the materials needed for prosthetics are available for delivery. Plus, the company recently received a much-needed boost from activist investment firm Cevian.
Last month, it acquired a 5.11% stake in Smith & Nephew with the aim of helping get things back on track. It has previously helped other struggling companies get back on their feet, and its members currently sit on 10 boards around the world. Since Cevian made its acquisition less than two months ago, the company has grown by 2.5% to 3.7% in 2018. The share price is up a whopping 20%.
Oh no, am I late to the party? I don't think so. With plenty of room for growth still, I wonder if the price could regain the all-time high of almost £20 it hit in 2019.
What do the finances say?
Smith & Nephew’s valuation looks quite attractive. The stock is estimated to be undervalued by 33% using a discounted cash flow model. It also has a forward price-to-earnings (P/E) ratio of 22.8, well below the industry average of 30. This is a big improvement from its previous P/E of 44, as earnings are expected to grow by 80% over the next 12 months.
In its first half 2024 results, earnings per share (EPS) rose 20% to 24p, while revenue and profit rose 3.4% and 24% respectively. Unfortunately, with a yield of just 2.4%, the company doesn’t offer much in terms of dividends. However, payouts were increasing prior to 2019, so that could continue if things go well.
Its joint venture in the United States continues to lose ground to its competitors, but elsewhere the hip and knee implant division is booming, along with sports medicine and otorhinolaryngology.
While developments have been positive, the threat of supply chain disruptions remains a significant risk. Ensuring operations continue uninterrupted while growing the US business will likely be a key concern for the company going forward.
However, I am very excited about the direction it is going and have firmly put the stock on my buy list for next month.
